Business

FinanceFundamentals of Financial Management (MindTap Course List)TIME VALUE OF MONEY ANALYSIS You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions: a. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2; (2) an ordinary annuity of $100 per year for 3 years; and (3) an uneven cash flow stream of −$50, $100, $75, and $50 at the end of Years 0 through 3. b. 1. What’s the future value of $100 after 3 years if it cams 4%, annual compounding? 2. What’s the present value of $100 to be received in 3 years if the interest rate is 4%, annual compounding? c. What annual interest rate would cause $100 to grow to $119.10 in 3 years? d. If a company’s sales are growing at a rate of 10% annually, how long will it take sales to double? e. What’s the difference between an ordinary annuity and an annuity due? What type of annuity is shown here? How would you change it to the other type of annuity? f. 1. What is the future value of a 3-year, $100 ordinary annuity if the annual interest rate is 4%? 2. What is its present value? 3. What would the future and present values be if it was an annuity due? g. A 5-year $100 ordinary annuity has an annual interest rate of 4%. 1. What is its present value? 2. What would the present value be if it was a 10-year annuity? 3. What would the present value be if it was a 25-year annuity? 4. What would the present value be if this was a perpetuity? h. A 20-year-old student wants to save $5 a day for her retirement. Every day she places $5 in a drawer. At the end of each year, she invests the accumulated savings ($1,825) in a brokerage account with an expected annual return of 8%. 1. If she keeps saving in this manner, how much will she have accumulated at age 65? 2. If a 40-year-old investor began saving in this manner, how much would he have at age 65? 3. How much would the 40-year-old investor have to save each year to accumulate the same amount at 65 as the 20-year-old investor? i. What is the present value of the following uneven cash flow stream? The annual interest rate is 4%. j. 1. Will the future value be larger or smaller if we compound an initial amount more often than annually (e.g., semiannually, holding the stated (nominal) rate constant)? Why? 2. Define (a) the stated (or quoted or nominal) rate, (b) the periodic rate, and (c) the effective annual rate (EAR or EFF%). 3. What is the EAR corresponding to a nominal rate of 4% compounded semiannually? Compounded quarterly? Compounded daily? 4. What is the future value of $100 after 3 years under 4% semiannual compounding? Quarterly compounding? k. k. When will the EAR equal the nominal (quoted) rate? l. 1. What is the value at the end of Year 3 of the following cash flow stream if interest is 4% compounded semiannually? (Hint: You can use the EAR and treat the cash flows as an ordinary annuity or use the periodic rate and compound the cash flows individually.) 2. What is the PV? 3. What would be wrong with your answer to parts l(1) and l(2) if you used the nominal rate, 4%, rather than the EAR or the periodic rate, I NOM /2 = 4%/2 = 2%, to solve the problems? m. 1. Construct an amortization schedule for a $1,000, 4% annual interest loan with three equal installments. 2. What is the annual interest expense for the borrower and the annual interest income for the lender during Year 2?BuyFind*arrow_forward*

14th Edition

Eugene F. Brigham + 1 other

Publisher: Cengage Learning

ISBN: 9781285867977

Chapter 5, Problem 42IC

Textbook Problem

**TIME VALUE OF MONEY ANALYSIS** You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions:

- a. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2; (2) an ordinary annuity of $100 per year for 3 years; and (3) an uneven cash flow stream of −$50, $100, $75, and $50 at the end of Years 0 through 3.
- b. 1. What’s the future value of $100 after 3 years if it cams 4%, annual compounding?
2. What’s the present value of $100 to be received in 3 years if the interest rate is 4%, annual compounding?

- c. What annual interest rate would cause $100 to grow to $119.10 in 3 years?
- d. If a company’s sales are growing at a rate of 10% annually, how long will it take sales to double?
- e. What’s the difference between an ordinary annuity and an annuity due? What type of annuity is shown here? How would you change it to the other type of annuity?

- f. 1. What is the future value of a 3-year, $100 ordinary annuity if the annual interest rate is 4%?
2. What is its present value?

3. What would the future and present values be if it was an annuity due?

- g. A 5-year $100 ordinary annuity has an annual interest rate of 4%.
1. What is its present value?

2. What would the present value be if it was a 10-year annuity?

3. What would the present value be if it was a 25-year annuity?

4. What would the present value be if this was a perpetuity?

- h. A 20-year-old student wants to save $5 a day for her retirement. Every day she places $5 in a drawer. At the end of each year, she invests the accumulated savings ($1,825) in a brokerage account with an expected annual return of 8%.
1. If she keeps saving in this manner, how much will she have accumulated at age 65?

2. If a 40-year-old investor began saving in this manner, how much would he have at age 65?

3. How much would the 40-year-old investor have to save each year to accumulate the same amount at 65 as the 20-year-old investor?

- i. What is the present value of the following uneven cash flow stream? The annual interest rate is 4%.

- j. 1. Will the future value be larger or smaller if we compound an initial amount more often than annually (e.g., semiannually, holding the stated (nominal) rate constant)? Why?
2. Define (a) the stated (or quoted or nominal) rate, (b) the periodic rate, and (c) the effective annual rate (EAR or EFF%).

3. What is the EAR corresponding to a nominal rate of 4% compounded semiannually? Compounded quarterly? Compounded daily?

4. What is the future value of $100 after 3 years under 4% semiannual compounding? Quarterly compounding?

- k. k. When will the EAR equal the nominal (quoted) rate?
- l. 1. What is the value at the end of Year 3 of the following cash flow stream if interest is 4% compounded semiannually? (Hint: You can use the EAR and treat the cash flows as an ordinary annuity or use the periodic rate and compound the cash flows individually.)

2. What is the PV?

3. What would be wrong with your answer to parts l(1) and l(2) if you used the nominal rate, 4%, rather than the EAR or the periodic rate, I_{NOM}/2 = 4%/2 = 2%, to solve the problems?

- m. 1. Construct an amortization schedule for a $1,000, 4% annual interest loan with three equal installments.
2. What is the annual interest expense for the borrower and the annual interest income for the lender during Year 2?

Fundamentals of Financial Management (MindTap Course List)

Show all chapter solutions

Ch. 5 - What is an opportunity cost? How is this concept...Ch. 5 - Explain whether the following statement is true or...Ch. 5 - If a firms earnings per share grew from 1 to 2...Ch. 5 - Would you rather have a savings account that pays...Ch. 5 - To find the present value of an uneven series of...Ch. 5 - The present value of a perpetuity is equal to the...Ch. 5 - Banks and other lenders are required to disclose a...Ch. 5 - What is a loan amortization schedule, and what are...Ch. 5 - FUTURE VALUE If you deposit 10,000 in a bank...Ch. 5 - PRESENT VALUE What is the present value of a...

Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE If you deposit money...Ch. 5 - TIME TO REACH A FINANCIAL GOAL You have 42,180.53...Ch. 5 - FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE What's...Ch. 5 - PRESENT AND FUTURE VALUES Of A CASH FLOW STREAM An...Ch. 5 - LOAN AMORTIZATION AND EAR You want to buy a car....Ch. 5 - PRESENT AND FUTURE VALUES FOR DIFFERENT PERIOOS...Ch. 5 - PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST...Ch. 5 - GROWTH RATES Shalit Corporations 2014 sales were...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE How long will it...Ch. 5 - FUTURE VALUE OF AN ANNUITY Find the future values...Ch. 5 - PRESENT VALUE OF AN ANNUITY Find the present...Ch. 5 - PRESENT VALUE OF A PERPETUITY What is the present...Ch. 5 - EFFECTIVE INTEREST RATE You borrow 85,000; the...Ch. 5 - UNEVEN CASH FLOW STREAM a. Find the present values...Ch. 5 - FUTURE VALUE OF AN ANNUITY Your client is 40 years...Ch. 5 - PV OF A CASH FLOW STREAM A rookie quarterback is...Ch. 5 - EVALUATING LUMP SUMS AND ANNUITIES Crissie just...Ch. 5 - LOAN AMORTIZATION Jan sold her house on December...Ch. 5 - FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find...Ch. 5 - PRESENT VALUE FOR VARIOUS DISCOUNTING PERIODS Find...Ch. 5 - FUTURE VALUE OF AN ANNUITY Kind the future values...Ch. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - NOMINAL INTEREST RATE AND EXTENDING CREDIT As a...Ch. 5 - BUILDING CREDIT COST INTO PRICES Your firm sells...Ch. 5 - REACHING A FINANCIAL GOAL Erika and Kitty, who are...Ch. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - REACHING A FINANCIAL GOAL Six years from today you...Ch. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You...Ch. 5 - NONANNUAL COMPOUNDING a. You plan to make five...Ch. 5 - PAYING OFF CREDIT CARDS Simon recently received a...Ch. 5 - PV AND A LAWSUIT SETTLEMENT It is now December 31,...Ch. 5 - REQUIRED ANNUITY PAYMENTS Your father is 50 years...Ch. 5 - REQUIRED ANNUITY PAYMENTS A father is now planning...Ch. 5 - TIME VALUE OF MONEY Answer the following...Ch. 5 - TIME VALUE OF MONEY ANALYSIS You have applied for...

Find more solutions based on key concepts

Show solutions How are managements actions incorporated in EVA and MVA? How are EVA and MVA interconnected?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

DEFAULT RISK PREMIUM A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-ycar corporate bond ha...

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Should an economic model describe reality exactly?

Brief Principles of Macroeconomics (MindTap Course List)

Name a way that your family interacts in the factor market and a way that it interacts in the product market.

Principles of Economics (MindTap Course List)

Analyze and compare Neiman Marcus and Kohls Neiman Marcus Group (NMG) is one of the largest luxury fashion reta...

Corporate Financial Accounting

In 1997 a woman sued a computer keyboard manufacturer, charging that her repetitive stress injuries were caused...

Probability and Statistics for Engineering and the Sciences

In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.

Principles of Macroeconomics (MindTap Course List)

Explain how absolute advantage and comparative advantage differ.

Principles of Microeconomics (MindTap Course List)

Problem 3-65B Preparation of Adjusting Entries West Beach Resort operates a resort complex that specializes in ...

Cornerstones of Financial Accounting

(Cooperatives) How do cooperatives differ from typical businesses?

ECON: MICRO4 (New, Engaging Titles from 4LTR Press)

Explain several social factors that affect ethics in an organization.

Foundations of Business (MindTap Course List)

Making Sense of Fortune Lists YOUR TASK. Using a research database, perform a search to learn how Fortune magaz...

Essentials of Business Communication (MindTap Course List)

Describe a denial-of-service attack. What controls are recommended to detect or correct such an attack?

Accounting Information Systems

The Tennessean, an online newspaper located in Nashville, Tennessee, conducts a daily poll to obtain reader opi...

STATISTICS F/BUSINESS+ECONOMICS-TEXT

Asset traded for similar asset A printing press priced at a fair market value of 275,000 is acquired in a trans...

Financial & Managerial Accounting

Statement of cash flowsindirect method The comparative balance sheet of Whitman Co. at December 31, 20Y2 and 20...

Financial And Managerial Accounting

How are inflation and unemployment related in the short run?

Essentials of Economics (MindTap Course List)

Dans Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its ...

Financial Accounting

What are the three major parts of a T account?

College Accounting, Chapters 1-27

Consider the leadership position of a senior partner in a law firm. What task, subordinate, and organizational ...

Management, Loose-Leaf Version

Contrast how marketing plans differ at various levels in an organization.

Contemporary Marketing

Explain the consumers postpurchase evaluation process

MKTG 12:STUDENT ED.-TEXT

If a company decides to increase advertising expense by 25,000, how will that affect the predetermined overhead...

Managerial Accounting: The Cornerstone of Business Decision-Making

A documentation tool that depicts the physical flow of information relating to a particular transaction through...

Accounting Information Systems

Use the information in Problem A-1 to solve this problem. Assume the delivery van is expected to have a useful ...

College Accounting (Book Only): A Career Approach

Waseca Company had 5 convertible securities outstanding during all of 2019. It paid the appropriate interest (a...

Intermediate Accounting: Reporting And Analysis

Financial statement data for years ending December 31 for Davenport Company follows: a. Determine the fixed ass...

Financial Accounting

Compute bond proceeds, amortizing premium by interest method, and interest expense Ware Co. produces and sells ...

Financial & Managerial Accounting

Using Figure 11.6 (pg. 416), speculate about the kinds of data that might be running along the data flow that c...

Pkg Acc Infor Systems MS VISIO CD

LOCKBOX SYSTEM Hardin-Gchr Corporation (HGC) began operations 5 years ago as a small firm serving customers in ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Which of the following markets are perfectly competitive or monopolistically competitive? Why? a. Soy market b....

Exploring Economics

Bank reconciliation Identify each of the following reconciling items as: (a) an addition to the cash balance ac...

Accounting (Text Only)

A survey of 131 investment managers in Barrons Big Money poll revealed the following: 43% of managers classifie...

Statistics for Business & Economics, Revised (MindTap Course List)

What is the purpose of Form 940? How often is it prepared, and what is the due date?

College Accounting (Book Only): A Career Approach

What is the function of the trial balance?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually e...

Principles of Macroeconomics (MindTap Course List)

accounting equation Determine the missing amounts (in millions) for the condensed balance sheets shown below.

Survey of Accounting (Accounting I)

A fertilizer company blends silicon and nitrogen to produce two types of fertilizers. Fertilizer 1 must beat le...

Practical Management Science

Classify the following quality costs as prevention, appraisal, internal failure, or external failure. Also, lab...

Cornerstones of Cost Management (Cornerstones Series)

Under the Clayton Act, which of the following was illegal, even if it was not shown to lessen competition subst...

Economics For Today

Under the decimal system of computing time worked at Timmerman Company, production workers who are tardy are do...

PAYROLL ACCT.,2019 ED.(LL)-TEXT

Rent seeking is individually rational but socially wasteful. Explain.

Economics (MindTap Course List)

Describe the technique of using Triangle Talk to plan a sourcing negotiation.

Purchasing and Supply Chain Management

Determining fixed assets book value The balance in the equipment account is 3,150,000, and the balance in the a...

Corporate Financial Accounting

Use the accompanying figure to answer questions 24. 2. Is the firm in the figure a natural monopoly? Explain yo...

Microeconomics

Diagrammatically represent what happens to the efficient number of gifts that a gift giver wants to give to a g...

Macroeconomics

Suppose the exchange rate between the United States and Mexico freely fluctuates in the open market. Indicate w...

Economics: Private and Public Choice (MindTap Course List)

What is the shortsightedness effect? How does it influence the attractiveness of government borrowing? Explain.

Microeconomics: Private and Public Choice (MindTap Course List)

The following questions are about your feelings toward communication with other people. Indicate the degree to ...

Understanding Management (MindTap Course List)

Suppose a firm can hire 100 workers at 8.00 per hour but must pay 8.05 per hour to hire 101 workers. Marginal f...

Micro Economics For Today

When an economic function is turned over to the government, social cooperation replaces personal self-interest....

Macroeconomics: Private and Public Choice (MindTap Course List)